Has offshoring had its day?

Could the tide be turning back towards the UK when it comes to locating business operations? Tim Gibson explores the prevailing currents

Is it possible that we have reached peak offshore? By that I mean the point at which the benefits of locating core business functions outside the UK are no longer self-evident, and companies decide to keep everything within home borders.

It certainly seems as if organisations that once offshored for a pastime are now pursuing precisely the opposite strategy by returning call centres and back-office functions to the UK. Take BT as a prominent case in point. It is busily reversing its offshoring activities in response to customer feedback.

“Inshoring”, or “reshoring”, as the reverse process is sometimes termed, seems to be all the rage among businesses in the UK and the US. Which begs a question: does it make any sense to look abroad for the location of business operations like call centres, Human Resources, and IT support? Or are companies better advised to root themselves firmly in their domestic economy?

Just Recruitment Group’s director, Peter Foy, has followed the changing attitudes to offshoring with interest. As a former senior manager in blue-chip companies like Capita and Xchanging, he has seen the offshoring debate travel full circle, and believes a nuanced assessment is needed.

“There was a time when offshoring made a huge amount of sense for UK businesses,” he says. “For a start, wages were so much lower in countries like India and China that companies could slash their labour costs, while using technology to maintain an apparently seamless delivery to end users.”

Such labour arbitrage, as it is known, seems to be wearing out. “It is inevitable that wages rise in countries that receive heavy investment from UK and US companies,” Mr Foy reflects. “Their presence has brought new opportunities, new wealth, and greater economic vibrancy. The upshot is wage inflation, meaning that the extra margins associated with offshoring are no longer so achievable.”

Added to that, a weak pound makes it more expensive to procure abroad, whether you’re buying people, raw materials or other business services. “The combination of these factors certainly raises questions about the current business case for offshoring if you’re based in the UK,” he notes.

For many companies, the biggest consideration is reputation rather than finance. BT’s reshoring strategy has been driven by the dissatisfaction of UK customers with Indian call centres. And while it is hard to quantify how much business has been lost as a direct result of such attitudes, offshoring certainly hasn’t been one of the company’s biggest PR wins.

“In a post-Brexit economy, it’s my instinct that the UK public will have even less tolerance of companies that locate core business functions abroad,” opines Mr Foy. “We’re supposed to be pulling together to make Britain great again. Locating elements of a business abroad, thereby creating employment opportunities for foreign workers rather than those in the UK, doesn’t play well against that rhetoric.”

The UK’s withdrawal from the EU may provide a further incentive to locate business operations on home territory. If the Chancellor of the Exchequer, Philip Hammond, pursues a policy of ultra-low corporation tax post-Brexit, then it will be even more cost-effective for UK businesses to focus their operations here.

“The government’s hope would presumably be that many foreign companies choose to base themselves in the UK as a result of such a policy,” Mr Foy remarks. “So not only have we reached peak offshore as a nation. We could even become a haven for foreign businesses, thanks to our weak currency and a favourable tax system.”

Set against that, the recruitment specialist sees ongoing opportunities for offshoring, even within his own industry. “I think UK businesses will increasingly locate customer-facing parts of their business at home,” he says. “But there are plenty of other aspects of running a commercial outfit that can still be done away from this country, in places where operating costs remain lower.”

Mr Foy gives the example of the use of job-matching software in pairing candidates with vacancies as an illustration. “This sort of data crunching takes place very much behind the scenes,” he reports. “There’s no reason why it couldn’t be conducted by an outsourced provider, located overseas. As well as improving a recruiter’s bottom line, such a move would enable around-the-clock operations, giving a real edge in the fast-paced jobs market.”

So offshoring may not quite have had its day. Especially when aligned to an outsourcing strategy, whereby companies pay third-party suppliers to conduct core elements of their business operations to save cost, it is likely to remain a part of the global commercial landscape for some time.

“I think outsourcing will drive the continued location of some business operations overseas,” Mr Foy continues, “because it doesn’t involve a company proactively looking beyond the UK. Instead, it involves choosing a supplier that represents the best value, and that organisation could well be located abroad.

“It’s about finding the right location for your business operations, and doing your best to make it work in a way that maximises profitability, ensures a high-quality service or product for end users, and makes a valuable contribution to the culture and wellbeing of the local community,” he concludes. “It’s not a question of offshoring or in/reshoring. Now, it’s all about ‘rightshoring’.”